The SBA’s standard operating procedures frown on refinancing one SBA 7(a) loan to another SBA 7(a) loan just to obtain a lower interest rate. Current SBA 7(a) borrowers need to have another substantial business benefit or justification for refinancing. Examples of reasonable business benefits include:
- Current SBA loan is over-collateralized – For example, when you received your current SBA loan, your home was required as collateral. But, currently, the collateral value of just your childcare assets are more than enough to support your current loan balance. You can eliminate your home from being used as collateral for your childcare center!
- Seller Financing debt was used for change of ownership – For example, when you acquired your childcare center, the previous owner provided some amount of seller financing. You want to payoff, in a lump sum, the seller financing for any number of reasons such as: 1) The training and transition to your ownership went well, and there is no business reason for continuing the seller financing. 2) The seller financing loan has a balloon payment coming up. 3) You feel that if you can payoff the seller financing loan in a lump sum, then you can negotiate a discount off of the seller financing debt.
- Consolidate Debt – For example, in addition to the SBA debt, your childcare center may have credit card debt or other debt that needs to be consolidated. When consolidated, there will be monthly tangible savings.
- Property Improvements are desired – For example, additional financing will enable you to make property improvements that either you or a franchisor wants. (ex: replace buses; improve playgrounds, grounds, building, or furniture to give a better first impression; improve technology for better management; replace curriculum & technology for better learning; make building addition to add classrooms…)
- Need working capital – For example, your childcare center is doing well, but sometimes money is tight because of the one month delay in receiving food program reimbursements, the couple weeks delay in receiving payments for government subsidized childcare for low-income families, or there is more than normal past due tuition payments from parents.
By refinancing your current high-interest rate SBA 7(a) debt into a lower-interest rate SBA 7(a) loan, you will save substantial interest expense in future years. But, those savings can only be obtained if you also have other business benefits (like one or more of the above benefits). For those childcare centers that should refinance, but, for whatever reason, can’t refinance into a conventional commercial loan or an USDA B&I loan, Childcare Brokers can help you refinance, and also help you get the funds needed for these other business benefits.